Think the pursuit of earnings won the tech sector’s big debate years ago? Think again. TheCheck out Xero’s first-half report on Thursday. Presenting its first result since a significant 15 per cent cut to headcount earlier this year, the company has ramped up its profitability.
Cost cuts are all well and good, but only when they hit the earnings line like a steam train, and provided that revenue growth also holds up as expected.If the cost cuts are not enough, then investors call for more. We’ve seen that in the United States where one round of a software company’s job cuts can quickly turn into two, three or four. The goal is to hit the much-talked about Rule of 40, which says a SaaS company’s revenue growth and profit margin should equal 40 per cent or more.
So Xero will keep investing in its business, but trying to be smart about that growth. It’s a fine line to walk. In terms of the numbers, Xero missed consensus revenue forecasts by 2 per cent and EBITDA forecasts by 4 per cent, on Visible Alpha consensus numbers.They sound like small misses, but it drags down full-year and future expectations. Xero shares trade at 11-times one-year forward revenue and 40-times EBITDA, both big premiums to the wider market because of its rocketing growth.
Its Australian and New Zealand franchise going strongly, with subscribers up 13 per cent on the same time last year and average revenue per user up 9 per cent on a constant currency basis. It has both double-digit revenue/subscriber growth and margin expansion, through pricing.The bigger potential prize is offshore, particularly in the United States.